Heroux-Devtek Reports Fiscal 2018 Second Quarter Results

Operating income of $4.6 million and net income of $3.2 million, or $0.09 per share

Adjusted EBITDA(1) of $12.0 million and adjusted net income(1) of $4.1 million, or $0.11 per share

Cash flows related to operating activities of $15.7 million, up from $6.2 million last year

Significant increase in free cash flow(1) to $13.3 million, versus $1.0 million last year

Backlog of $498 million as at September 30, 2017, up from $451 million three months ago

Héroux-Devtek Inc. (TSX:HRX), ("Héroux-Devtek" or the "Corporation"), a leading international manufacturer of aerospace products, today reported its results for the second quarter of fiscal 2018 ended September 30, 2017. Unless otherwise indicated, all amounts are in Canadian dollars.

"Héroux-Devtek generated a solid free cash flow in the second quarter, which further strengthened its financial position. The backlog increased significantly and has risen by nearly $100 million since the beginning of the fiscal year. Subsequent to the end of the quarter, we received customer certification in regards to an additional surface treatment process at our Strongsville, Ohio facility, as part of our long-term contract for the Boeing 777 and 777X aircraft. This will allow us to perform more value-added activities internally and reduce our costs," said Gilles Labbé, President and CEO of Héroux-Devtek.

"Looking ahead, the second half of our fiscal year has usually been stronger and this year should be no exception. As well, we are looking forward to closing the acquisition of Compañia Española de Sistemas Aeronauticos, S.A. ("CESA"), announced on October 2, near the end of our current fiscal year. This highly-strategic transaction will allow us to continue building a sustainable future for Héroux-Devtek by expanding our reach in Europe, broadening our proprietary product and service offering, as well as gaining important content on several key programs and access to new customers, including a direct relationship with Airbus," added Mr. Labbé.

FINANCIAL HIGHLIGHTS

Quarters ended Sept. 30,

Six months ended Sept. 30,

(in thousands of dollars, except per share data)

2017

2016

2017

2016

Sales

89,677

91,571

176,534

187,161

Operating income

4,644

11,584

10,052

19,180

Adjusted EBITDA1

12,032

14,095

23,972

28,416

Net income

3,163

9,519

7,190

14,698

Per share - diluted ($)

0.09

0.26

0.20

0.41

Adjusted net income1

4,057

5,677

8,084

11,261

Per share ($)

0.11

0.16

0.22

0.31

1 This is a non-IFRS measure. Please refer to the "Non-IFRS Measures" section at the end of this press release.

SECOND QUARTER RESULTS

Consolidated sales reached $89.7 million, compared with $91.6 million in the second quarter of fiscal 2017. This 2.1% decrease reflects lower sales in the commercial aerospace market and a net negative impact on second-quarter sales of $1.0 million resulting from year-over-year fluctuations in the value of the Canadian currency versus foreign currencies. These factors were partially offset by an increase in sales in the defence aerospace market.

Commercial sales decreased 13.4% to $42.2 million, versus $48.7 million last year. This year-over-year decline is mainly attributable to the scheduled ending of a Tier-2 contract, lower customer requirements for certain business jet and regional jet programs, as well as unfavourable currency fluctuations. These factors were partially offset by the ramp-up of deliveries to Boeing for the 777 program.

Defence sales increased 10.8%, from $42.9 million to $47.5 million. This variation is essentially due to increased sales to civil customers resulting from higher spare parts requirements and the catch-up of certain manufacturing deliveries, as well as higher repair and overhaul ("R&O") sales to the U.S. Air Force. These factors were partially offset by lower R&O sales to European customers and unfavourable currency fluctuations.

Gross profit was $13.6 million, or 15.1% of sales, versus $16.0 million, or 17.5% of sales, last year. The decline mainly reflects a higher under-absorption of manufacturing costs due to excess capacity and processing and finishing costs related to the Boeing 777 program. These processing and finishing costs are expected to normalize upon completion of the customer qualification and approval of Héroux-Devtek's surface treatment processes. This factor was partially offset by favourable year-over-year currency fluctuations equivalent to 0.3% of sales.

Operating income amounted to $4.6 million, or 5.2% of sales, compared with $11.6 million, or 12.7% of sales, last year. This year's operating income included acquisition-related costs of $0.9 million in connection with the agreement to acquire CESA, while last year's operating income included a $5.2 million gain on settlement of litigation, partially offset by legal fees of $1.5 million. In addition, year-over-year fluctuations in the value of the Canadian currency versus foreign currencies had a negative impact of $1.1 million on operating income in the second quarter of fiscal 2018. Adjusted EBITDA, which excludes non-recurring items, was $12.0 million, or 13.4% of sales, compared with $14.1 million, or 15.4% of sales, a year ago.

Net income for the second quarter of fiscal 2018 was $3.2 million, or $0.09 per diluted share, compared with $9.5 million, or $0.26 per diluted share, a year ago. Excluding non-recurring items net of taxes, adjusted net income reached $4.1 million, or $0.11 per share, versus $5.7 million, or $0.16 per share, last year.

As at September 30, 2017, Héroux-Devtek's funded (firm orders) backlog stood at $498 million, versus $451 million three months earlier. This increase mainly reflects the confirmation of additional orders as part of the Boeing 777 and 777X contract.

SIX-MONTH RESULTS

For the first six months of fiscal 2018, consolidated sales reached $176.5 million, versus $187.2 million in the first six months of fiscal 2017. Year-over-year fluctuations in the value of the Canadian currency versus foreign currencies increased sales by $0.4 million. Commercial sales reached $85.5 million versus $99.3 million a year ago, while defence sales totalled $91.0 million compared with $87.9 million last year.

Gross profit for the first half of fiscal 2018 amounted to $26.5 million, equivalent to 15.0% of sales, compared with $32.1 million, or 17.2% of sales, in the first half of fiscal 2017. Operating income was $10.1 million, or 5.7% of sales, versus $19.2 million, or 10.2% of sales, a year ago. Year-over-year fluctuations in the value of the Canadian currency versus foreign currencies decreased operating income by $1.1 million. Adjusted EBITDA reached $24.0 million, or 13.6% of sales, versus $28.4 million, or 15.2% of sales, a year earlier.

Net income was $7.2 million, or $0.20 per diluted share, in the first six months of fiscal 2018, compared with $14.7 million, or $0.41 per diluted share, in the first six months of fiscal 2017. Adjusted net income stood at $8.1 million, or $0.22 per share, versus $11.3 million, or $0.31 per share, last year.

SOLID CASH FLOWS AND HEALTHY FINANCIAL POSITION

Cash flows related to operating activities amounted to $15.7 million in the second quarter of fiscal 2018, versus $6.2 million in the second quarter of fiscal 2017. This improvement mainly reflects a net favourable variation in non-cash working capital items. As a result, Héroux-Devtek generated a solid free cash flow of $13.3 million in the second quarter of fiscal 2018, up significantly from $1.0 million last year. For the first half of fiscal 2018, cash flows related to operating activities were $18.3 million, compared with $11.5 million a year earlier, while free cash flow amounted to $13.7 million, versus $0.5 million last year.

Given this free cash flow generation, Héroux-Devtek's financial position remained healthy as at September 30, 2017, with cash and cash equivalents of $52.8 million, while total long-term debt was $130.7 million, including the current portion, but excluding net deferred financing costs. Long-term debt includes $52.4 million drawn against the Corporation's authorized Credit Facility of $200.0 million. As a result, the net debt position was $77.9 million at the end of the second quarter, down from $91.8 million three months earlier. The net-debt-to equity ratio was 0.21:1 as at September 30, 2017, versus 0.25:1 three months earlier.

CONFERENCE CALL

Héroux-Devtek Inc. will hold a conference call to discuss these results on Monday, November 6, 2017 at 8:30 AM Eastern Time. Interested parties can join the call by dialling 1-877-223-4471 (North America) or 1-647-788-4922 (overseas). The conference call can also be accessed via live webcast at Héroux-Devtek's website, www.herouxdevtek.com/investor-relations/events or www.gowebcasting.com/9006.

If you are unable to call in at this time, you may access a tape recording of the meeting by calling 1-800-585-8367 and entering the passcode 1602325 on your phone. This tape recording will be available on Monday, November 6, 2017 as of 11:30 AM Eastern Time until 11:59 PM Eastern Time on Monday, November 13, 2017.

PROFILE

Héroux-Devtek Inc. (TSX:HRX) is an international company specializing in the design, development, manufacture and repair and overhaul of landing gear and actuation systems and components for the Aerospace market. The Corporation is the third largest landing gear company worldwide, supplying both the commercial and defence sectors of the Aerospace market with new landing gear systems and components, as well as aftermarket products and services. The Corporation also manufactures hydraulic systems, fluid filtration systems and electronic enclosures. Approximately 90% of the Corporation's sales are outside Canada, including about 65% in the United States. The Corporation's head office is located in Longueuil, Québec with facilities in the Greater Montreal area (Longueuil, Laval and St-Hubert); Kitchener, Cambridge and Toronto, Ontario; Springfield and Strongsville, Ohio; Wichita, Kansas; Everett, Washington; and Runcorn, Nottingham and Bolton, United Kingdom.

FORWARD-LOOKING STATEMENTS

Except for historical information provided herein, this press release contains information and statements of a forward-looking nature concerning the future performance of the Corporation. Forward looking statements are based on assumptions and uncertainties as well as on management's best possible evaluation of future events. Such factors may include, without excluding other considerations, fluctuations in quarterly results, evolution in customer demand for the Corporation's products and services, the impact of price pressures exerted by competitors, and general market trends or economic changes. As a result, readers are advised that actual results may differ from expected results. Please see the Guidance section in the Corporation's MD&A for the quarter ended September 30, 2017, for further details regarding the material assumptions underlying the forecasts and guidance. Such forecasts and guidance are provided for the purpose of assisting the reader in understanding the Corporation's financial performance and prospects and to present management's assessment of future plans and operations, and the reader is cautioned that such statements may not be appropriate for other purposes.

NON-IFRS MEASURES

Earnings before interest, taxes, depreciation and amortization ("EBITDA"), adjusted EBITDA, adjusted net income, adjusted earnings per share and free cash flow are financial measures not prescribed by International Financial Reporting Standards ("IFRS") and are not likely to be comparable to similar measures presented by other issuers. Management considers these to be useful information to assist investors in evaluating the Corporation's profitability, liquidity and ability to generate funds to finance its operations. Refer to Non-IFRS financial measures under Operating Results in the Corporation's MD&A for definitions of these measures and reconciliations to the most comparable IFRS measures.